Income and Wealth

This study note looks at the difference between income and wealth

Income is not the same as wealth

Income is a flow of money going to factors of production:

• 1.Wages and salaries paid to people from their jobs
• 2.Money paid to people receiving welfare benefits such as the state pension and tax credits
• 3.Profits flowing to businesses and dividends distributed to shareholders
• 4.Rental income flowing to people who own and lease out property
• 5.Interest paid to those who hold money in deposit accounts or who own bonds etc.

Wealth is a stock concept – it is a large amount of money or valuable possessions and can be held in different ways:

• 1.Savings held in bank deposit accounts
• 2.Ownership of shares issued by listed companies and equity stakes in private businesses
• 3.The ownership of property
• 4.Wealth held in bonds
• 5.Wealth held in occupational pension schemes and life assurance schemes

Wealth generates income for if you have built up savings balances they ought to pay interest (although interest rates are low at the moment!). Shares lead to a flow of dividend payments. An occupational pension scheme will eventually allow someone to receive an income when they have retired.

Inequality in the distribution of income and wealth

Living standards depend on the level of economic activity and on the redistribution of resources within society as a whole. The level of inequality of income and wealth can be measured by:

• The share of national income going to different groups in society, the poorest 20% of households at the bottom of the income scale through to the richest 20%
• The proportion of all households who must live on an income below an official ‘poverty line’. For the UK and other European Union countries, the current poverty line is an annual income of less than 60% of median income. The median individual is in the middle of the income distribution
• In 2009, 18% of individuals in the UK were in households with an income below the poverty line
• Per person net worth of people in the UK was measured at £119,000 in 2013, up from £115,000 in 2012
• Another key measure of inequality is something known as the Gini Coefficient

Mean and median income in the UK

For 2009 the figures (in £s per week) were as follows:

• Median income = £407 per week
• Mean income = £507 per week
• The official poverty line is 60% of the media = £244 per week

6 per cent of individuals in Britain live in households with disposable incomes of £1,000 per week or more and this helps to explain why the mean value for household income exceeds the median.